Free trade zones of one kind or another have been around since at least the 1930s, but when the Taiwan government created an export-processing zone (EPZ) in Kaohsiung in December 1966 – half a century ago this month – it was still a very bold move.

“Two major psychological barriers and a number of minor problems had to be overcome before the idea evolved into an actual program,” the late K. T. Li, the technocrat given much credit for Taiwan’s economic transformation, wrote in his 1988 book The Evolution of Policy Behind Taiwan’s Development Success.

The first obstacle was that “resentment of the extraterritoriality (freedom from local jurisdiction) enjoyed by foreigners in prewar China created opposition to both free trade zones and EPZs,” said Li. “Although it is true that the zones allowed investors to operate under a different set of rules than those outside – which was the whole point – they were nonetheless [Taiwan’s] rules.” The second barrier was the fear of exploitation – “the sale of relatively cheap Taiwanese labor for the enrichment of foreign investors,” as Li put it.

There was also a concern that companies inside the EPZ would have an unfair advantage over exporters operating outside the zone. But as Li pointed out, enterprises that invested in the EPZ had already established their export markets, so they posed little threat. “Indeed, during the early years they helped promote Taiwan as a supplier of light consumer goods and not merely as a source of agricultural products,” Li explained. “In fact, after visiting factories located in the EPZs, foreign buyers would necessarily come to Taipei to examine products produced by firms outside the EPZs. In this way, new business connections were established. Consequently, I have always regarded the EPZs as showcases for our industries.”

The EPZ was created just as Taiwan was beginning its export-driven economic takeoff, and it became a source of national pride. Among early investors in the zone were companies that helped established the foundations of Taiwan’s information, consumer electronics, optics and TFT-LCD industries, including Philips Electronic Building Elements Industries (now known as NXP Semiconductors Taiwan Ltd.), Hitachi, and Canon.

According to an August 1972 report, of the 161 factories in Kaohsiung’s EPZ, 37 were electronics manufacturers, 23 made textiles, 21 produced handicrafts, and 14 were garment manufacturers. Only the first of these sectors is still important. Nowadays, the EPZs’ most important tenants are semiconductor testers-and-packagers and LCD companies. Electronics production no longer means TVs and radios, but flat-panel displays for mobile phones and components for photovoltaic arrays. Intangible goods like apps, as well as animation and cloud-computing services, are coming out of the zones’ software parks.

Over the years, EPZ tenants have became important customers for Taiwanese companies outside the zones. Back in 1967, a mere 2.1% of the inputs shipped into Kaohsiung’s original export-processing zone were of local origin. By 1973 that figure had risen to 17%, and in the 1980s it reached 33%. Last year domestic inputs equaled 48% of the zones’ total export value, according to the Ministry of Economic Affairs’ Export Processing Zone Administration (EPZA).

Today several hundred export-processing zones operate around the world, and many of those set up in the 1970s and 1980s were directly inspired by Kaohsiung’s success.

The original site, a 68.3-hectare plot next to the city’s harbor, filled up so quickly with factories that within five years new zones had been designated in what are now Taichung City’s Tanzi District and in former sugarcane fields in Kaohsiung’s Nanzi District.

Between late 1967 and 1976, total employment in the zones grew 13-fold. Since then, the number of workers has fluctuated, but the current tally of 81,045 (12.4% of whom are foreign nationals) is the highest it has been in this century. The most recent nadir was in 2009, when employment came to 58,002. In addition, the workforce is far better educated than ever before, with recent data showing that 7.5% of zone employees hold graduate degrees.

The Nanzi Export Processing Zone Central Road in 1986 (Photo: EPZA)

Advantageous timing

First-mover advantage was one reason for the EPZs’ initial popularity with investors. In a 1992 issue of Asian Survey, Canada-based academics Jing-dong Yuan and Lorraine Eden wrote: “EPZs in Taiwan and South Korea were established in the late 1960s when the first wave of global industrial restructuring was taking place. A new international division of labor was created as multinational enterprises in labor-intensive, non-complex, light industries began to move offshore to reduce production costs… There were few other countries with EPZs, so they faced little direct competition.”

As Yuan and Eden explained: “Both countries had already achieved a measure of economic growth by the late 1950s so that labor-intensive industries were relatively well developed, making it possible for zone enterprises to establish linkages with domestic producers.” Japanese colonial rule was a recent memory in both countries, making them “natural sites for Japanese FDI.”

Half the NT$138.2 billion total foreign investment in Taiwan’s EPZs between their creation and October 2016 came from Japan, according to EPZA data.

Although the zones’ contribution as a proportion of the island’s exports has declined since 1974, when they stood at just over 9%, the 2014 figure of 4.7% was the highest for some years. Cumulatively, exports from EPZ tenant enterprises have earned Taiwan around US$76 billion.

The EPZA now supervises seven EPZs, a logistics park, and two software parks. In all, they cover 530.3 hectares. The number of tenant companies now totals 602, up from 568 at the end of 2013. Manufacturing tenants pay a service charge of 0.08% to 0.22% of turnover (to reward success, the rate is regressive).

Both software parks have made notable progress. Total sales volume of the Kaohsiung Software Park approached NT$15 billion in 2015, 30% higher than in 2014, and 100% of the land (but not all of the office space) in the Taichung Software Park has been rented out.

In the past, the zones offered a very different business environment compared with the rest of Taiwan. The infrastructure was better and the paperwork less onerous, but until 1986 the tenant manufacturers were required to export everything they produced.

The science parks in Hsinchu, Taichung, and Tainan nowadays enjoy a higher profile than the EPZs, but the former undoubtedly benefited from Taiwan’s experience with the latter. “The statute for the establishment and administration of the science parks, as well as the systems of one-stop services and factory-building land, are all copied from the export-processing zones,” says EPZA Director-General Huang Wen-Guu.

Even though the rest of the island has caught up in terms of simplified procedures and efficient transportation links, the EPZA still strives to accommodate every qualified investor. “The main challenge is that we lack space,” says Huang. “We need to expand, or figure out how to relocate older buildings to make space.”

“The land inside the existing zones has reached saturation point, but thanks to our first renewal project, we’ve managed to release 2.62 hectares on which LITE-ON Technology Corp. is going to build its headquarters and R&D center,” says Huang. LITE-ON is a major producer of power supplies, consumer electronics, and optoelectronic products.

In 2010, the EPZA created the Nanzi Export Processing Zone II (NEPZ II), less than one kilometer southwest of the EPZA headquarters, on land formerly owned by the Veterans Affairs Commission. This move, however, added just 8.49 hectares, all of which has already been reserved by existing EPZ tenants planning to expand their facilities.

Huang also confirms that the EPZA is negotiating to obtain some of the land that will be freed up by the closure of the CPC Corp. Taiwan refinery just over a kilometer to the southeast of the administration’s headquarters inside the Nanzi Export Processing Zone (NEPZ).

Environmental concerns

Noting that public concern about the environmental impact of factories makes finding new sites difficult throughout Taiwan, Huang admits that the EPZs, unlike the country’s science parks, are still associated by many members of the public with old-fashioned, polluting industries. This notion is unlikely to go away soon, and may have been exacerbated by the water-pollution scandal involving Advanced Semiconductor Engineering (ASE), the world’s largest provider of independent semiconductor manufacturing services in assembly and testing. In 2013, ASE was found to have discharged wastewater with high levels of acidity and nickel into a river near the NEPZ, where it operates 12 facilities.

According to Citizen of the Earth, a Kaohsiung-based environmental protection group, ASE’s Kaohsiung facilities received a total of 48 environmental penalties between March 2011 and June 2014. Earlier this year, however, the Kaohsiung High Administrative Court revoked penalties imposed by the Kaohsiung City Government’s Environmental Protection Bureau.

ASE has since invested NT$750 million in a state-of-the-art facility to treat and recycle wastewater from its Kaohsiung operations. Construction of the water plant received EPZA approval in March 2012, and the facility began trials in January 2015. With the first phase of the project now complete, the plant handles up to 20,000 metric tons of wastewater per day.

Half of the water is recycled and returned to ASE’s facilities for reuse; the other half is discharged into the city’s drains. “The effluent not only conforms to local regulations, but the average concentration values are far less than the regulatory limit,” stresses ASE Kaohsiung Senior Vice President K.C. Chou.

He adds that ASE Kaohsiung’s average daily water consumption is already over 30,000 metric tons, and is expected to top 35,000 metric tons within three years. The project’s second phase, which will bring the total investment to NT$1.15 billion, will raise the daily capacity to 40,000 metric tons.

“Our water recycling plant was built to respond to the risk of water shortages and restrictions, but most importantly to reduce effluent as part of ASE’s environmental sustainability,” Chou explains. Given the current low price of water in Taiwan, he points out, “ASE would spend less money if we purchased municipal water, instead of using the reclaimed water from the recycling plant.”

ASE’s water-recycling efforts have benefited from data shared by the EPZA, which operates its own water reclamation plant in the NEPZ. Planning for the latter plant began in 2008, and the project was entirely funded by the Ministry of Economic Affairs’ Water Resources Agency (WRA). Using a combination of filtering and reverse osmosis, the facility recycles up to 1,800 metric tons of water per day, all of which is then reused by NEPZ tenants.

Staff at the plant say that removing industrial pollutants from water is much more difficult than cleaning household wastewater. Properly recycling water is not only better for the environment, they note, but can extend the lifespan of cooling towers and other infrastructure by reducing the buildup of boiler scale.

The WRA regards the NEPZ plant as a demonstration and educational project. Lessons learned there will be applied to much larger water reclamation projects in other parts of Taiwan.

In addition to recycling a very large proportion of the water it uses, ASE aims to reduce its impact on the environment by incorporating “green building” concepts in several of its facilities, including five in NEPZ II.

In 2012, ASE’s K12 building received a Diamond rating, the highest possible under EEWH, Taiwan’s official sustainable-architecture certification system. The following year, it achieved Platinum certification under LEED, the U.S. equivalent of EEWH.

According to the company’s website, by the end of 2015, ASE facilities had received nine EEWH certifications (two being Diamond), and three LEED certifications (one Platinum and two Gold). “In addition, we plan to pursue EEWH certification for 13 [other] new and existing buildings, as well as LEED certification for five new buildings,” Chou added.

“Interesting features of the ASE green buildings, besides energy efficiency, clean air emissions, and the surrounding greenery are permeable pavements, culverts so the movement of wildlife is not impeded, and rooftop gardens,” says Chou.

The installation of ultra-efficient lighting and heating, ventilation and air-conditioning systems cuts electricity consumption. Toilets are flushed and the grounds watered using harvested rainwater, and water reused from compressors and machine washing. Surprisingly, given Kaohsiung’s reliable sunshine, none of the buildings have PV arrays. “We’ll be evaluating that option in 2017,” says Chou.

Despite the extensive use of recycled materials – 29.41% in the case of K12, 21.71% for the newer K21 facility – green buildings do not come cheap. “The construction cost of K12 was 4% higher than it would have been for a non-green building,” says Chou.

Recently, ASE’s environmental efforts have been winning other kinds of recognition. The company received the 2016 Asia Responsible Entrepreneurship Award (AREA) in the “Social Empowerment” category. This September, ASE was proclaimed the top-scoring company in the Semiconductor and Semiconductor Equipment Industry Group in the 2016 Dow Jones Sustainability Indices (DJSI) review. At the beginning of November, ASE was the only company from Taiwan to appear on the Climate A List issued by CDP, a not-for-profit global disclosure organization that promotes climate mitigation plans and the reduction of carbon emissions.

Taiwan Business TOPICS

Taiwan Business TOPICS is published monthly by the American Chamber of Commerce in Taipei, and covers current topic affecting business conditions in Taiwan, an Industry Focus section on a particular industrial sector, and other reports prepared by the magazine’s staff of experienced professional journalists.